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CFDs
Macquarie Prime takes on CFD market
Karin Derkley - June 2007

Macquarie is out to grab a bigger share of the increasingly lucrative CFD (contracts for difference) market with its new ultra-geared trading platform Macquarie Prime. Macquarie Equity Markets Group associate director Dan Semmler says that the cost and trading efficiencies of Macquarie Prime are likely to make other CFD providers redundant. “This is a real evolution of the CFD product. It’s difficult to see why any investor would continue to use CFDs to invest in Australian shares,” he says.

The Macquarie Prime platform combines margin lending on shares, CFD trading and a high yield cash management account. According to Semmler, it’s the ultimate convergence story, combining a number of products already on the market and adding the extra kicker of a high interest account, and the ability to offset between long and short funding. That compares to other CFD providers, who Semmler says offer no such offsets, and pay a much lower interest rate (generally around 2% below the benchmark bank interest rate) when they are ‘borrowing’ for a short position than when they are lending for a long position.

Semmler says that the ability to highly gear shareholdings – and take both long and short positions on shares - means investors can take advantage of the benefits of share ownership, such as franking credits, while enjoying maximum leverage of their capital. That virtually eliminates the need for investors to use CFDs except to hedge their existing portfolio, he says. Which is when the cost benefits of the multi-faceted product come into their own, he adds. An investor who had held BHP for 11 months, for instance, and wanted to hedge against the possibility of an imminent price fall, could use CFDs to short BHP while still holding on to their existing shares, thus benefiting from the 50% discount capital gains tax by not having to sell before the full 12 months. In the meantime, the funding of the short position on BHP CFDs would offset the funding costs of the (leveraged) long position on BHP shares, reducing the overall costs of holding the position.

So are other CFD providers in Australia quaking in their boots in anticipation of a mass exodus to the Macquarie platform?

Hamish McCathie of CFD Trading doesn’t think so. He says that for CFD traders the Prime platform suffers from two major disadvantages. One is its restriction to trading Australian shares. The Macquarie CFD platform uses the direct market access (DMA) model, which it claims offers the most transparent pricing and cost structure to investors. However it also means it can’t provide access to indices, both here and overseas, over sectors and regions, commodities and foreign exchange, trading in which makes up around half of CFD transactions in Australia.

“That is what our traders really want to have access to,” McCathie says. “They want to be able to trade the Asian indices and the gold index, and trade foreign currency, as well as Australian shares. It just makes sense to have access to that all in one place.”

Another problem with the Macquarie product, McCathie says, is that even the 95% gearing is still not as high as that provided by most CFD providers. “We require only a 3% margin on BHP for instance, which is half that required by Macquarie Prime,” McCathie says. “You could be using that extra capital to do other things – working for you in a separate cash management trust, or paying off your mortgage.”

In fact only the top 40 ASX shares allow 95% gearing, and maximum gearing levels drop steadily beyond the top 200. Not all shares in the Macquarie Prime product can be shorted either. Even amongst the top 40 ASX shares seven cannot be shorted – including Wesfarmers, Macquarie Bank and Coles. A quarter of the next 140, which can be geared to 90%, cannot be shorted. Beyond that level only the occasional share can be shorted.

Macquarie’s most impressive claim however concerns the difference in funding costs between a standard CFD account and the Macquarie Prime product. It uses an example of a $500,000 geared share portfolio (with $325,000 in long positions and $175,000 in short positions) held for one year in a Macquarie Prime Facility versus one held with a regular CFD provider. The cost differences are dramatic - just $928 for the Macquarie Prime portfolio, compared to $15,123 for the CFD provider.

But is it a fair comparison? As one CFD commentator points out, CFD traders rarely hold positions for a year: “That’s not how it works. If they're holding them for longer than a few months it’s not cost efficient.”

Another dubious aspect of the calculations is the use of franking credits, McCathie points out. The Prime scenario takes $4800 worth of franking credits into account to come up with the total holding cost. “CFD traders aren’t interested in things like franking credits,” McCathie says. “If they are they should use an equity account.”

One commentator suspects that the Macquarie Prime platform is more likely to attract business from the institutional end of town rather than from other CFD providers. “A lot of those people are still nervous about the idea of using CFDs, so for them the ability to highly gear physical shares will probably appeal.” In so doing however the Macquarie Prime product might help shake-up the CFD industry in a way that benefits everybody, he says. “I think we’ll be seeing better interest rates on cash holdings, plus offsets between long and short funding, as others match the benefits that Macquarie is offering. That can only be a good thing,” he says.

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Karin Derkley is the former deputy editor of Personal Investor magazine, and continues to write for The Age and AFR Smart Investor. She is author of “Buying & Selling Your Home for Dummies,” published by Wiley Australia.